Bill of exchange

Updated: Aug 20, 2021

An I.O.U. used in international trade by which the drawer makes an unconditional undertaking to pay the drawer a sum of money at a given date, usually three months ahead. In principle a bill of exhange is similar to post-dated cheque, and like a cheque it can be endorsed for payment to the bearer or any named person other than the drawee. A bill of exchange has to be ‘accepted’ (endorsed) by the drawer before it becomes negotiable. This function is normally performed by an accepting house, but bills may also be accepted by a bank (it is then known as a bank bill) or by a trader (trade bill).

Once accepted, the drawee does not have to wait for the bill to mature before getting his money; he can sell it on the money market for a small discount. Bills of exchange, also reffered to as commercial bills, were first developed in inland trade by merchants who wished to resell goods before making payment for them. They later became of great importance in international trade, but with the development of other means of credit, their use declined, although in recent years there has been som revival of interest in their use by commercial corporations.

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
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James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.